Posts Tagged Washington Post

Is the U.S. Losing the Broadband Race? As It Turns Out, We Look a Lot Like Danica Patrick

Since the publication of Susan Crawford’s book on the  alleged failings of U.S. Internet policy, several mainstream outlets have DAYTONA BEACH, FL - FEBRUARY 24: Clint Bowyer,...run stories repeating her  mantra that Internet speeds are too slow, coverage is shoddy, there is a growing “digital divide” among rich and poor, and  broadband prices are too high.

Consider the barrage of “bad news” in just one week:

  • The Wall Street Journal reported that six percent of Americans “lack high-speed service” in a story provocatively titled “Gaps Persist in High-Speed Web Access”;
  • The Financial Times reported that the United States ranks 16th in Internet speeds, and that U.S. prices on a per-megabit-per-second basis (Mbps) are more than double those in Europe; and
  • Digital Trends ran an article touting Ms. Crawford’s policies titled “Admit It: U.S. Internet Service Sucks.”

Are things as gloomy as the naysayers claim? A close look at the facts suggests otherwise. (Yes, that is a link to Need for Speed, my new e-book on Internet policy from Brookings Press; if Bob Woodward can shamelessly promote his book in the Washington Post when reporting the origins of the sequester, surely I can do the same.)

Let’s start with connection speeds. According to Akamai, a global provider of Internet services, the United States ranked ninth in average connection speeds (7.7 Mbps) in the third quarter of 2012, and seventh in percent of Internet connections with speeds above 10 Mbps (18 percent). South Korea leads both categories (average speed of 14.7 Mbps, 52 percent above 10 Mbps). It’s a bit misleading to compare our speeds with those of the fastest country in the world; a seven-minute-per-mile runner looks shoddy compared to the fastest runner in the world. And like any average, our nationwide average speed combines fast connections with slow ones. For example, the average connection speed in eight states (mostly along the densely populated Northeast corridor) exceeds 9 Mbps; any of those states would rank third fastest in the world on Akamai’s list. It’s a bit of a stretch to say that we are the tortoise among rabbits; the United States is more like Danica Patrick, who finished eighth at Daytona on Sunday.

Moving on to coverage gaps. The empirical basis for the share of Americans without “high-speed service” is the FCC’s annual report on the state of broadband deployment. There are two important caveats to keep in mind when assessing these data: The FCC counts wireline connections only, and only those wireline connections that exceed 4 Mbps. Thus, a wireline connection of say 3 Mbps (such as DSL) would not be counted in the FCC’s tally, and a wireless connection of say 10 Mbps (such as 4G LTE) would also be ignored. As of 2011, the latest year for which the FCC has reliable data, only about 7 million U.S. households did not have broadband access; if wireless broadband technologies are counted, the number of households without access to broadband at the FCC’s minimum speed is in the range of 2 to 5 million. It is hyperbole to suggest that broadband operators have ignored large swaths of the country.

And what about that growing “digital divide”? Once again, the naysayers ignore speedy wireless connections to create the appearance of a problem. It is not surprising that wealthier people have greater access to the Internet; they likely have greater access to most goods in the U.S. economy. A 2012 Pew survey shows that the same percentage of white, black, and Hispanic adults (roughly 62 percent) go online wirelessly with a laptop or a cellphone; that slightly more blacks and Hispanics own a smartphone than do whites (49 versus 45 percent); and that twice as many blacks and Hispanics go online mostly using their cell phone compared to whites (38 versus 17 percent).

The third statistic may indicate that blacks and Hispanics lack wireline access relative to whites or that blacks and Hispanics simply have stronger preferences for wireless connections relative to whites; if the latter, there is no problem to be solved. And if income differences explain the differences in broadband choices, income-based subsidies are the logical policy instrument.

Broadband price comparisons. There is a lot of casual empiricism in this area. International price comparisons of a differentiated product such as Internet connectivity should be taken with a grain of salt because the quality of Internet service might not be comparable. Moreover, if you put a gun to a provider’s head (as regulators do in Europe), and require it to make its services available to resellers at incremental costs, you are going to get cheap service—and destroy investment incentives as a nasty byproduct. Citing “harsher rules that have sapped profitability,” Reuters reported that European telco stocks were trading at roughly 9.9 times earnings compared to 17.6 times for their U.S. peers.

In large swaths of this country, the incumbent cable operator faces a fiber-based telco offering triple-play packages. Unless you think that cable operators are colluding with the telcos—a position espoused by Ms. Crawford—Internet prices are less than monopoly levels where telco-based fiber is available. And help is on the way for the rest of us in the form of wireless 4G LTE offerings, satellite broadband connections, and further telco deployment.

This is not to say that market forces and a largely hands-off Internet policy have delivered the ideal state of competition. In a market with large fixed costs, when consumers are reluctant to switch providers, and when certain must-have video programming is controlled by the incumbent cable operator, we shouldn’t expect ten broadband providers in each zip code.

The United States appears to being doing just fine in the broadband race; perhaps not in first place, but certainly deserving of a cameo on the next GoDaddy commercial. Any efforts to stimulate greater deployment should be targeted, and they should respect the incentives of broadband operators to continually upgrade their networks. The naysayers have misdiagnosed the state of broadband competition.

Advertisements

, , , , , , , , ,

Leave a comment

The Administration’s Rigorous Defense of the Affordable Care Act

In yesterday’s Washington Post, Health and Human Services Secretary Kathleen Sebelius makes an impassioned plea for skeptics to reconsider the Affordable Care Act. Secretary Sebelius argues that the Act will bring down health care costs by, among other things, assisting those who cannot afford health insurance coverage. Although expanding health insurance coverage is a worthy goal, bringing more folks into the health care system could result in higher prices for health care services. The housing market provides a nice example: although subsidized mortgage rates allowed more people to own homes, more buyers eventually meant higher home prices.

Secretary Sebelius reminds us of the broth of new regulations designed to constrain the worst impulses of insurance providers, including requiring providers to justify premium increases above 10 percent in an online forum; to spend at least 80 percent of premium dollars on health care as opposed to salary or advertising; to accept applicants with preexisting conditions; and to charge zero copays for so-called preventative services. This level of micro-management seems excessive, even by regulated-industry standards.

Given the raging debate over the constitutionality of the Act’s requirement that everyone buy health insurance, the other provisions of the Act have received relatively little attention. To an economist who believes in the efficacy of prices to allocate scarce resources in an economy, the zero-copay rule is perhaps the most offensive provision of the Act. Even for preventative services, a positive copay ensures that users do not abuse their privileges. For any doubters (who live or work in major cities), look out the window during rush hour to see what happens when an activity (using a road) is priced at zero. It is not clear that the increase in demand for preventative services will be offset by the promised decrease in demand for treatment of chronic ailments. Moreover, providers are likely to react to a zero-copay rule by raising deductibles; these terms are highly interrelated. Finally, there is no limit to what constitutes preventative medicine; some men do get breast cancer, but not enough to justify free mammograms for all men.

This is not the first time the Administration has imposed a zero-price rule. The chairman of the Federal Communications Commission, who was carefully screened by President Obama on the issue of net neutrality, adopted the Open Internet Order, which banned an Internet service provider (such as AT&T) from charging a price to an Internet content provider (like Sony) in exchange for speedier delivery. Under the Commission’s rationale, if some websites could not afford the surcharge for higher quality of service, then no one should.

It seems that prices for “critical” services such as preventative medicine and Internet access are evil because they exclude certain segments of the economy. To be fair, under certain conditions such as information asymmetries, externalities, and adverse selection (common in health insurance markets) market-based prices may result in too little or too much consumption relative to the socially optimal level. But the attacks on the price mechanism by these two pieces of regulation do not seem to be grounded in those traditional market-failure arguments. Without a limiting principle, one could oppose prices for just about any good or service, as there will always be someone who cannot afford it. Better to leave prices in place (and subsidize those who cannot afford the “critical” service) than to ban pricing altogether. In contrast to a zero-price rule, the cost of the subsidy is transparent to taxpayers.

, , ,

Leave a comment

Are You Plane Rich? An Example of Marginal Analysis

I just returned from a long weekend in the Caribbean, attempting to recreate the scenery of (and a few scenes from) The Bachelor. Given the ubiquity of Wi-Fi coverage, I was able to stay connected with my favorite newspapers and magazines: iPhone in one hand, Mojito in the other. Just as I was feeling like a one-percenter, I stumbled upon a story about Newt Gingrich’s propensity to use private air travel. According to the Post, “for at least two years [Gingrich] insisted upon flying private charter jets everywhere he traveled, with most of the costs—ranging from $30,000 to $45,000 per trip—billed to [his company] American Solutions.”

The hefty price tag for private air travel is in line with a quote I recently obtained from a representative of a major jet leasing operation, which allows customers to purchase 25 hours of private air travel at $166,000 on a small Cessna jet that comfortably seats five. (Use it in 18 months or lose it.) This luxury amounts to $6,640 per hour of flight time or $33,200 for a five-hour round trip, smack in the middle of what Gingrich pays. How rich—or what strange preferences—would induce someone like Gingrich to pay that much for such a privilege? (Perhaps the same preferences that would induce you to run up a $500,000 tab at Tiffany.)

This question can be answered with the economist’s tool of marginal analysis. Let’s compare the price of private air travel to the closest (inferior) substitute: first-class air travel. To fly a family of five on a first-class journey lasting 2.5 hours in each direction, one must shell out about $7,000. (American Airlines charges $1,400 for the 2.5 hour flight in first class from DC to Miami, and United charges slightly less for a two-hour trip from DC to Chicago.) Thus, the premium for private air travel over first class is roughly $26,200 per trip (equal to $33,200 less $7,000).

To be fair, the $26,200 premium for private air travel is not a total loss. Relative to first-class travel, private air travel allows you to avoid airport baggage lines, avoid travelling with “commoners,” paparazzi, and would-be terrorists, achieve a certain elite status among your friends, and choose your own routes and flying times. Rock stars might value the option of doing drugs or other things 30,000 feet in the air. (I intentionally omitted “avoid airport security lines” because first-class passengers skip to the front of the security lines.) Using the logic of revealed preference, we can safely infer that any customer (including Gingrich) who opts for private air travel must value these enhancements by at least $26,200—else he would fly first-class.

Having consulted my preferences and budget constraints, I have decided that I am not plane rich. (Given my wife’s reaction to the mere suggestion of our flying first-class, I wouldn’t even mention private air travel within her striking distance.) For any normal set of preferences, at what income level does the $26,200 premium for private air travel make sense? The target audience seems to be top actors, rock stars, and small- and mid-cap company executives. Large-cap company executives presumably have access to company-owned jets. Are there enough of these folks out there to support this niche industry? Warren Buffett seems to think so.

, , , , ,

Leave a comment

The Washington Post columnists on the Supercommittee

My apologies to TOTM readers for taking last week off. A firm retreat in Phoenix followed by a hearing in Oklahoma City really puts a crimp on one’s fun time. In the meantime, the BCS announced that it is considering eliminating the automatic-qualification offers to BCS conference champions. The ACC and Big East must not be pleased. Proof that what gets written on this blog has a significant (and positive) impact on the world around us.

Joking aside, in Washington this week, the Supercommittee designed to solve the nation’s budget crisis is dominating the headlines. One wonders whether Washington Post writers who follow economic affairs coordinate their opinions. Within a day of the Supercommittee’s announced failure, at least three prominent columnists have reached the identical opinion regarding who is to blame for the Supercommittee’s failure: President Obama. Today, Michael Gerson writes “The supercommittee failed primarily because President Obama gave a shrug.” In another column, Ezra Klein writes “There’s not much we can do, they [the Obama administration] say, in a world where congressional Republicans won’t agree to a reasonable deal. In most cases, that’s true. In this case, it’s really not.” Klein questions why Obama never embraced the Bipartisan Fiscal Commission report (aka the “Bowles-Simpson report”). Finally, in yesterday’s Post, Robert Samuelson writes “The reason we cannot have a large budget deal is that Americans haven’t been prepared for one. The president hasn’t educated them, and so they can’t support what they don’t understand.” Samuelson explains that if we don’t address these entitlement programs, their costs will nearly double as a share of national income, which will displace spending in other areas or necessitate further tax increases or both.

If these opinions flowed exclusively from right-of-center columnists, then they could be discounted as political posturing. While Gerson was the lead speech writer for George W. Bush, Klein and Samuelson are hardly batting from the right. Will a “consensus” emerge among the center-left that Obama is to blame for the budget crisis, and will it propel Obama to confront the entitlement morass? Or do the political benefits of shirking the entitlement debate outweigh the costs? The lasting power of entitlements stems from the self-reinforcing dependency among the beneficiaries (who come to depend on the program) and the members of the political party protecting the program (who come to depend on the built-in constituency for votes). It would require tremendous leadership and courage for Obama to transcend politics as usual, and to save us from a Greek-like financial calamity. If he is not up for this task, look for the Republican presidential candidates to make Obama’s leadership issue number one in the 2012 election.

P.S. It’s probably best not to bring up budget deficits or Greek-like crises during the Thanksgiving meal. Better for your family to digest the food thoroughly before falling asleep on the couch. When in doubt, talk sports. Here’s a good conversation starter: When was the last time we cared about the Detroit Lions this late into the season?

, , , , ,

Leave a comment

Exclusion and the BCS

Every year around this time—around week 10 of college football season—we are reminded of the inequity of the Bowl Championship Series (BCS) system. Instead of permitting an open playoff system to determine the college football champion, as is done by most other NCAA sports including Division II football since 1973, and more famously, NCAA basketball, the BCS uses a computer algorithm and polls to decide the contestants according to, among other things, regular season performance, the teams’ conferences (BCS-approved or not), and strength of schedule. In particular, six of the ten BCS playoff slots are set aside for teams from BCS conferences.

While choosing the best team in the country is relatively easy, choosing the second-best team is highly controversial, as the second-best team will have some warts. Going into the ninth week of the season, here is a look at the BCS standings: LSU (.9931), Oklahoma State (.9447), Alabama (.8836), Stanford (.8749), and Boise State (.8473). Despite losing at home to LSU this weekend, Alabama is BCS-ranked above undefeated Stanford and Boise State.

In today’s Washington Post, columnist John Feinstein makes a compelling antitrust argument against the BCS:

But here’s the real nightmare scenario for the boys of the Bogus Championship Series: Oregon beats Stanford; Oklahoma beats Oklahoma State. That’s when the BCS apologists will start screaming for an LSU-Alabama rematch.

Is Boise State better than Alabama? Who knows? If college football were a real sport with a real playoff system or tournament, we might get a chance to find out. But you can bet all the TV money in the world that if you were to acquire [Alabama’s head coach] Nick Saban’s cellphone records you wouldn’t ever find a call to the 208 area code to set up a home-and-home with Boise State.

That’s why the money-huggers who argue that Boise’s schedule doesn’t make it worthy of playing for the championship have no argument at all. All of the so-called big-time schools who have played Boise in recent years — Georgia, Virginia Tech and Oklahoma come to mind — have lost. In fact, Boise’s only two losses in the last four years were to TCU and Nevada, who also aren’t worthy of playing for anything meaningful, according to the money men.

What Mr. Feinstein has articulated sounds very much like a coordinated refusal to deal by BCS conferences and their schools against Boise State (and perhaps against TCU in prior years) to maintain their share of the profits generated from post-season Division I football. In economic parlance, a non-BCS team’s strength of schedule—the key factor cited by BCS teams to support exclusion from sharing in the prize—depends on the willingness of BCS teams collectively to schedule games against the attacker. Proving coordinated refusals to deal are quite difficult—the inquiry concerns whether each participant would find it in its unilateral interest not to schedule games with tough non-BCS teams in the absence of the alleged conspiracy—but I am confident that several economists (including your fearless writer) would line up to correct this inequity.

One might argue that no BCS team has an incentive to schedule a tough non-conference opponent, for fear of adding a loss to its record. To this I say poppycock: Bubble teams—teams from weak BCS conferences (like the ACC or Big East) or teams at the bottom of a strong BCS conference (like the SEC)—seek a tough non-conference opponent to bolster their conference victories. In contrast, a team at the top of the SEC simply needs to win its conference. That Virginia Tech (of the weak ACC) and Georgia (at the bottom on the SEC) invited Boise State to play in 2010 and 2011, respectively, does not disprove Feinstein’s conspiracy theory—those teams needed to prove something. Better evidence would be an invite from LSU or Alabama. But alas, those teams seem to schedule tough non-conference games with BCS conference teams. LSU invited Oregon (Pac 10, BCS) and West Virginia (ACC, BCS) this year. It would be good for football—and the competitive process generally—if these non-conference invitations were made irrespective of the opponent’s conference (BCS conference or not).

, , , ,

Leave a comment

The Bulldozer Solution to the Housing Crisis

My inaugural blog on two-sided markets did not elicit much reaction from TOTM readers. Perhaps it was too boring. In a desperate attempt to generate a hostile comment from at least one housing advocate, I have decided to advocate bulldozing homes in foreclosure as one (of several) means to relieve the housing crisis. Not with families inside them, of course. In my mind, the central problem of U.S. housing markets is the misallocation of land: Thanks to the housing boom, there are too many houses and not enough greenery. And bulldozers are the fastest way to convert unwanted homes into parks.

(Before the housing advocates lose their cool, an important disclaimer: Every possible effort should be made to keep a family in their homes, including taxpayer-financed principal modifications for deserving, underwater borrowers. My proposal applies only to vacated homes that have completed the foreclosure process.)

Until the Washington Post ran an article last week, titled Banks turn to demolition of foreclosed properties to ease housing-market pressure, I was reluctant to admit my position in public. I had whispered my idea into the ears of several finance professors, but none was willing to stand behind it. And for good reason: How can one advocate bulldozing a home when so many families are losing their homes?

According to the Post, some of the nation’s largest banks have begun giving away abandoned properties to the state and even footing the $7,500 bill per demolition. In 2009, Ohio passed a law creating “land banks” with the power and money to acquire unwanted properties and put them to better use, like community gardens. Similar laws were passed in Georgia, Maryland, and New York. Wells Fargo donated 300 properties nationwide last year, and Fannie Mae donated 30 properties per month to the Cuyahoga (Ohio) land bank. The story even identified a “land bank expert” at Emory University. Now that the Post has given me cover of plausibility, let’s discuss the costs and benefits.

One of the first lessons in an undergraduate microeconomics class is that bulldozing homes to create construction jobs is a bad idea. Even after those new construction workers rebuild the bulldozed homes, society has the same amount of homes as before but lacks whatever output those workers could have created in the alternative. The objective of economic policy is not to maximize jobs—if that were the case, entire cities would be bulldozed and reconstructed—but rather to allocate resources efficiently. Because so many economists have this lesson in mind (and because so many are pacifists), it is hard to embrace any policy that involves a bulldozer.

But this bulldozer scheme is motivated for different reasons. Too much land has been allocated to homes, many of which were built in bubble during the early half of last decade. As a result, too many neighborhoods in America are afflicted with abandoned properties. A vacant house is estimated to be worth half its normal market value. Imagine trying to sell your house at market rates when a close facsimile is available across the street for half the price! To add insult to injury, the excess supply of abandoned houses invites vandalism and neighborhood blight—the textbook negative externality—further depressing home values. Using data from foreclosures in the Cleveland area, Kobie and Lee (2010) show that the length of time that a home is in foreclosure has a significant drag on neighboring home values.

Well-functioning markets tend to equilibrate supply and demand, but housing markets are highly inefficient in this regard because of the time lag between beginning construction and selling a home: A housing boom sends signals to builders that new construction will be profitable. By the time the housing bust comes, the new builds become permanent mistakes.

To illustrate this “market failure,” consider downtown Miami. A drive down Brickell Avenue reminds one of New York City. Whereas there used to be one row of high-rises on the bay-side, the avenue now boasts rows and rows of developments as far as the eye can see. Had the developers known that many of these complexes would stand empty—the Census Bureau estimates that a whopping 18 percent of Florida’s homes stood vacant in March 2011—they would have tempered their enthusiasm. According to the Florida Association of Realtors, the inventory overhang has sent home prices plunging: the median price for homes sold in January 2011 was seven percent less than January 2010, and prices are expected to fall by another five percent in 2011.

And why is this so troubling for the economic recovery? According to the Fed, the nation’s stock of household real estate declined by $6.5 trillion since 2006. A family spends its income based in part on its perceived wealth; when housing values decline, families spend less. Economists call this the “housing-wealth effect.” Case, Quigley and Shiller (2006) found a statistically significant and rather large effect of housing wealth upon household consumption, and weak evidence of a stock market wealth effect.

A robust stock market might offset this decline in wealth (and hence spending), but the Dow hasn’t cracked 13,000 since April 2008. In the meantime, families are hoarding their cash. The $6.5 trillion elimination in household wealth puts the President’s $300 billion jobs-stimulus program in perspective: If the housing-wealth effect is dragging down spending, then a one-time injection of $300 billion dollars won’t have much of an impact. In contrast, a 10 percent increase a housing wealth—housing values are off 30 percent since 2006—would increase consumption between 0.4 and 1.4 percent according to Case, Quigley and Shiller.

When applied to vacated homes that have completed the foreclosure process, the bulldozer scheme would eliminate some of the excess supply of housing, which would temper the downward pressure on home values. In the place of a cluster of abandoned homes sucking the life of a neighborhood, imagine a children’s park, a dog park, or a community garden. Now that the banks have figured out bulldozing can be cheaper than maintaining the properties, paying taxes, and marketing the properties, the only thing stopping this idea from gaining traction is public sentiment.

My lunch crowd, comprised of economists, retort that the elimination of excess housing supply via bulldozers might be a boon to existing homeowners but would punish future homeowners. But wouldn’t a future homeowner prefer to invest in a slightly more expensive asset class with expected growth over a less expensive asset class with negative expected growth for the foreseeable future?

Finally, the bulldozing scheme need not be mutually exclusive with other schemes to relieve the housing crisis. Other ideas are worth trying, even if they wouldn’t spur much economic activity. Some are calling on Congress to eliminate the barriers keeping underwater homeowners from refinancing their mortgages. According to Macroeconomic Advisers, such a plan might boost GDP growth by 0.1 to 0.2 percentage points, as it merely redistributes money from lenders to borrowers. Others have called for massive debt forgiveness, achieved via a federal program to purchase troubled mortgages and give homeowners better rates. As Ezra Klein of the Post points out, however, the politics of using taxpayer dollars to pay off mortgages are impossible to crack. To stabilize the housing market, Larry Summers calls on government sponsored enterprises to finance mass sales of foreclosed properties to those prepared to rent them out, and to drop their posture of opposition to experimentation for programs such as principal reductions.

Whichever course we take, speed is of the essence: The housing drag is not going away on its own. According to RealtyTrac, the nation’s banks, along with Fannie Mae and Freddie Mac, have an inventory of more than 816,000 foreclosed properties, with an additional 800,000 working their way through the foreclosure process. Insisting that each of those homes be paired with a family—a noble cause—is tantamount to pushing off recovery for several more years.

I modestly propose to remove a fraction of these homes from inventory. If you don’t like the ring of a bulldozer scheme, how about “The Neighborhood Parks” scheme? Even if I can’t convince any economists to get on board, environmentalists should be pleased.

, , , , , ,

Leave a comment